Coating its pockets

The first thing I look at before I invest in any company is its balance sheet. boohoo’s balance sheet is rather healthy, with a 10.4% debt-to-equity ratio and enough cash at £70m to make up for its £50m debt. Its assets also sufficiently cover its liabilities, which is always a good sign. However, boohoo has taken on debt in its most recent half while also having its cash position cut almost in half. According to management, this was done to offset an increase in capital expenditure (Capex) as the company invests more in facilities to scale its growth prospects.

boohoo growth

boohoo reported that its net sales were up 10% in its most recent quarter. Active customers, orders, and order frequencies all saw an increase as well, but with that also comes a fly in the ointment. For starters, all regions bar the UK saw declines in growth. This was due to “Significantly longer customer delivery times as a result of the pandemic”, as international sales are fulfilled through its UK production line. But although customers and orders continue to grow, the average order value and items per basket have seen a decline, thus impacting quality earnings.

Moreover, boohoo has been experiencing declining annual sales growth. Its growth rate has seen a steady decline from 48% in 2019 to 41% in 2021. Furthermore, its profit margin has gone down from 5.5% in 2019 to 3.1% in its latest half. This shows me that the retailer is struggling to keep up with rising costs as inflation continues to run rampant. Primarily, carriage, freight, and labour have seen the biggest uptick in costs, with the AIM company expecting the drag to continue for the rest of the year. Nevertheless, investors will be hoping that the new US distribution centre set to open in 2023 will help ease the firm’s current supply chain constraints.

Nevertheless, investors will be hoping that the new US distribution centre set to open in 2023 will help ease the firm’s current supply chain constraints.

Hoo’s the future?

On the one hand, boohoo’s exciting ventures into the NFT and metaverse space could be a game changer if it succeeds. Its aggressive marketing strategy also shows the firm’s commitment to grow its sales numbers. Not to mention, it is investing more in automation in order to offset rising labour costs.

On the other hand, boohoo does face strong headwinds. Sky-high inflation has forced central banks to increase interest rates, and this has had a stifling impact on companies’ growth prospects. People are less willing to borrow and spend money at higher interest rates. This is evident in the latest GDP figures, which showed a decline in economic growth. The latest retail sales numbers did not look very promising either, showing a contraction.

While the boohoo share price looks reasonable at its current valuation, declining sales growth, spiralling costs, and a stalling economy, do not justify the opportunity cost for me to invest in boohoo. Therefore, I do not see this as a favourable climate for me to buy the shares for my portfolio.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Bearish trajectory

I think there are two main reasons why the Boohoo share price is falling. Firstly, the company has seen a number of allegations about underpayment of workers in its supply chain. In December 2020, the Guardian reported that in a Pakistani factory, workers were paid just 29p an hour to manufacture Boohoo garments. Similar cases have plagued Boohoo throughout 2021.

In addition to this, the company is fighting a £100m lawsuit over misleading advertising. I think the constant ESG battles Boohoo seems to face is beginning to turn investors sour. Unless it can begin to solve these issues, I think the Boohoo share price has further to fall in the future.

Secondly, the spike in growth for 2020 seems to have slowed throughout 2021. I would expect this to be the case, as pandemic restrictions ease and people spend more time in physical stores rather than shopping online. Boohoo reported a 40% rise in revenues for 2020. However, the growth forecast for 2021 is 25%. I think this is another reason the Boohoo share price has been falling in recent months.

Reasons to be optimistic

That being said, there are a number of reasons why I think the Boohoo share price could rise in the near future. The company’s net cash position looks healthy at just under £200m, which is encouraging, considering its recent acquisitions that have included Karen Miller, Oasis, Debenhams, and Dorothy Perkins. These acquisitions also help Boohoo add vital market share, which will help ward off competition and increase revenues.

Despite this, the group’s margins have stayed strong. Revenues rose from £195m in 2016 to £1.4bn in 2020. Over the same five years, profits rose from £15m to £91m representing margins of just under 10% in both years. This shows me the firm can stay consistently profitable, even while massively scaling up operations. This fact, coupled with the recent acquisitions, gives me confidence for the future of the share price.

Boohoo share price: The verdict

If Boohoo can get some of its ESG problems in check, I think the group has a bright future ahead of it. The current P/E ratio of Boohoo is 29.5, which is over half its five-year average. Therefore, I think the current Boohoo share price offers some good value.

For me, the fact that margins have stayed in check despite the ambitious expansion, is the most encouraging factor. This coupled with a historically lower valuation makes me think Boohoo could be one of the hottest UK retail stocks to add to my portfolio today.

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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

After rising close to an all-time high in May, it fell back in July, although it has since recovered all of these losses. Over the past 12 months, the stock is up 39% and over the past five years, it has produced an annual return of 41%, turning every £1,000 invested into £7,500. 

Great success story

Boohoo is one of the London market’s great success stories of the past five years. The company has gone from strength to strength since its listing in March 2014, and it doesn’t look as if it is going to slow down any time soon.

According to a trading update issued by the business today for the first half of its financial year, management now believes “that results for the current financial year will be ahead of previous guidance, with group sales growth now expected to be between 33% and 38%.“

Boohoo had previously been expecting sales growth of between 25% and 30% for the full-year. On top of this, management anticipates “EBITDA margins for the financial year to remain at around 10%,” a performance which reflects “anticipated investments across the financial year into the three brands acquired by the group in the first half.“

So far this year, Boohoo has acquired the online businesses of fashion brands Karen Millen, Coast and MissPap. 

Beating expectations

Today’s trading update from the company seems to suggest Boohoo is on track to report earnings growth of as much as 38% for its current financial year.

This is slightly above what the City was expecting. Analysts had pencilled in earnings growth for the year of 35%. That being said, Boohoo’s figures are only based on trading during the first half of its financial year, and a lot could change in the second half.

Still, I think it is highly impressive that the company can achieve such a fantastic performance when the high street is struggling to remain solvent.

Premium price 

Boohoo’s earnings growth is highly impressive, but the one thing I am worried about is the company’s valuation.

You see, at the time of writing, the stock is trading at a forward P/E ratio of 49, based on current City growth forecasts. As I have noted above, these forecasts are now out of date, but they are not that far off the mark. Even after factoring in Boohoo’s better than expected growth rate, the stock is still trading at a forward P/E of more than 40. 

If the earnings continue to grow at a rate of 30%+ per annum, this valuation shouldn’t be a problem. Indeed, it hasn’t been for the past five years.

However, if growth slows, then the market could punish the stock quite severely. The problem is, if sales do slow, investors are usually the last ones to know, which means it is difficult to get out in time.

With this being the case, I’m quite happy to watch from the sidelines for the time being. Boohoo is a growth champion, but I think its premium valuation is just asking too much. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This is a huge turnaround from the company’s performance last year. The stock lost nearly 20% in 2018 as investors started to fret about its growth potential and valuation.

Boohoo has proven its doubters wrong over the past 12 months with a series of robust trading updates. At a time when so many high street retailers are struggling to remain solvent, sales at the online retail giant have continued to grow exponentially. It doesn’t look as if the company’s growth is going to slow down any time soon. 

Charging ahead

At the end of April Boohoo, which sells its own branded clothes alongside PrettyLittleThing, Nasty Gal and MissPap, reported revenue growth of 48% to £856.9m for its 2019 financial year. These figures blew past analyst expectations. The City was expecting growth of just 46%. 

Unfortunately, the company didn’t manage to hit profitability targets. Analysts were expecting the group to report pre-tax profit growth of 55% to £67m, but the final number came in £7m lower at a shade under £60m. 

Still, the impressive sales figures restored confidence in the company and its outlook, and analysts are expecting more of the same of this year. They’ve pencilled in earnings growth of 35% for fiscal 2020 followed by growth of 27% for 2021. 

However, following an announcement today from the company, there is a strong chance analysts might have to go back and revise these numbers higher.

New acquisition

Management has announced that the company has made an offer to buy “the online business of renowned British brands Karen Millen and Coast, together with all associated intellectual property rights.”

According to Boohoo’s press release on the potential acquisition, management believes “the online business of these brands would represent highly complementary additions to its scalable multi-brand platform.” 

I think such a deal could boost Boohoo’s growth. The enterprise has a history of acquiring fashion brands and then throwing its marketing weight behind them to turbocharge sales. Under Boohoo’s ownership, these established British brands will also be able to make use of the group’s delivery infrastructure, lowering distribution costs and increasing service quality.

If this deal does go through, I reckon there’s a good chance Boohoo will beat analysts expectations for growth this year.

Time to buy?

So as Boohoo continues to grow, is it worth buying the stock before it is too late?

I think the shares are quite expensive at current levels. They are currently dealing at a forward P/E of 47, but I’ve said this before, and I’ve been proven wrong. 

With this being the case, I think it might just be worth buying into this growth story at current levels as it doesn’t look as if Boohoo is going to slow down any time soon. Watching from the sidelines could mean that you continue to miss out on one of the most successful British business growth stories in recent years.

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That was at the end of February. Since then, the Boohoo share price has taken off. At the time of writing, the stock is up a staggering 48% year-to-date. So, is now the time to buy the Boohoo share price, or is caution still needed?

Driving growth

Investors rushed to its shares last week when the fast-fashion e-commerce retailer announced results for 2018. The company’s smashed expectations with revenue growth of 48% and adjusted earnings before interest and tax growth of 49% to £75.1m.

Profit before tax for the year increased by 38% to £59.9m, and diluted earnings per share increased 19% to 3.2p. Boohoo reported strong growth across its three primary businesses, the flagship Boohoo brand, PrettyLittleThing and Nasty Gal.

Growth was particularly impressive at PrettyLittleThing where revenues increased 107% to £374.4m, compared to just 16% at Boohoo itself. This division now comprises 44% of overall group revenue.

However, as I’ve mentioned before, the holding company only owns 66% of PrettyLittleThing, and it’s investing heavily in marketing this business. The number of active customers using PrettyLittleThing increased 70% year-on-year in 2019 to 5m, and these customers placed a total of 14.3m orders, up 89% year-on-year. The number of orders placed on Boohoo’s flagship platform rose 10% during the year to 14.9m.

These figures concern me because they show Boohoo’s growth is slowing and the company is becoming increasingly reliant on its subsidiaries to produce the kind of revenue growth the market has come to rely on. I’m not suggesting the two businesses might part ways anytime soon, but the fact that the parent doesn’t own all of the business could cause problems further down the line. The subsidiary is run by Umar Kamani, the son of Boohoo’s founder and chief executive Mahmud Kamani.

A high price to pay

I’m also still concerned about Boohoo’s valuation. At the time of writing, shares in the retailer are dealing at a forward P/E of 48.4 and a PEG ratio of 2.1. So even after factoring in the City’s lofty growth expectations (analysts have pencilled in earnings per share growth of 35% for 2020) the stock still looks expensive.

In my opinion, this eye-watering growth multiple doesn’t leave any room for disappointment. If the company fails to meet the City’s expectations for earnings growth, or if sales growth at any of the group’s subsidiaries starts to flag, shareholders could rush for the exits, and the downside could be substantial.

Considering all of the above, I’m still cautious for the Boohoo share price outlook. While the firm’s growth rate cannot be overlooked, I’m concerned about its valuation. There are many other companies out there that offer better value for your money, in my opinion.

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Since the article was published, shares in the company have fallen a further 5%. And I believe this could be just the start of the group’s fall from grace. Today, I’m going to explain why I believe the Boohoo share price has further to fall. 

Competitive sector 

There’s no denying that Boohoo and peer Asos have revolutionised the online fashion industry over the past decade. These two have almost single-handedly upended the traditional brick & mortar fashion sales channel, pushing down prices and pushing up customer expectations. 

However, copycat companies are now starting to spring up left, right and centre, and traditional retailers are starting to get their act together as well. 

Analysts believe these pressures are already starting to cause a headache for Boohoo. One group of City analysts have identified 11 other companies in the UK that are taking on Boohoo directly, meaning the company is having to spend more money on marketing and promotional pricing. 

That said, as the second biggest in the sector, I think it’s highly likely the group will be able to fend off competition. The question is, at what cost?

Cracks starting to show 

After looking carefully at Boohoo’s numbers, I think cracks are already beginning to show in its business model. The company’s latest trading update, published at the beginning of January, touted its new forecast for topline growth of 43-45%, higher than the previously-expected 38-43%, mainly thanks to a near doubling of sales at the Pretty Little Thing fashion brand.

In comparison, sales at the group’s largest division, Boohoo, only increased by 15%, below City expectations. So, sales growth at the core business is slowing, but Pretty Little Thing is bounding ahead. The problem is, Boohoo only owns 66% of this faster-growing business. The other thing I’m worried about is Boohoo Group’s valuation. 

Look out below 

As the firm has expanded in recent years, it’s been easy to justify a sky-high multiple for the shares. However, with competition intensifying and growth slowing, I believe the risks are increasing and the group won’t be able to achieve the City’s lofty targets for growth. 

And if this does happen, shares in the fast fashion retailer could fall rapidly as they are currently dealing at a forward P/E of 44 which, in my opinion, looks expensive, even when you factor in the City’s growth projections. Indeed, the stock is currently trading at a PEG ratio of 1.7.

Having said all of the above, I think Boohoo still has enormous brand value with consumers, so I don’t believe the company’s growth will evaporate overnight. However, with the stock trading at such a high multiple, I see minimal upside from here for investors but plenty of potential downside.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As my Foolish colleague Paul Summers noted at the time, the company reported a year-on-year increase in revenues of 44%, and more importantly, a gross margin of 54.2% up 1.7%.

The fact that Boohoo’s margins are growing is highly impressive, especially when, only a few weeks ago, its peer Asos warned that its margins would decline in 2019 and investors rewarded the company by dragging its share price down 40%. 

Off the back of this robust Christmas trading, management now believes AIM-listed Boohoo will see revenue growth for the full year of 43% to 45%, higher than the previously expected 38% to 43%.

These numbers are all impressive, but the market didn’t reward the company for its growth. Instead, the stock was marked down by nearly 10% on the day of the release.

The shares have since recovered some lost ground, although they are still off around 14 points from before the trading update. Is this decline worth taking advantage of?

The market is not buying it 

Boohoo’s headline growth numbers might look impressive, but they don’t tell the whole story. For example, sales at the Pretty Little Thing fashion brand roughly doubled year-on-year. However, sales at the group’s largest division, Boohoo itself, only rose 15%, below the 18% analysts had been predicting.

Boohoo has been investing heavily in promoting its Pretty Little Thing brand since it was acquired at the end of 2016, and the numbers seem to suggest that this heavy investment is having an impact on Boohoo’s flagship brand. That being said, margin expansion indicates management is investing in the right business, so I’m not too worried about Boohoo’s slowing growth right now.

What I am concerned about, however, is valuation. The stock is changing hands at a forward P/E of 47, which is easy to justify with earnings expected to expand by 43% for fiscal 2019. City analysts have not yet had a chance to update their forecasts following the upbeat trading update earlier this week, so I think these estimates understate Boohoo’s potential. But the valuation becomes harder to justify with growth slowing.

Caught off-guard 

If it starts to suffer a decline in demand for its products, investors may start to panic and with such a high valuation currently placed on the stock, the resulting share price decline could be significant.

Still, as of yet, it doesn’t look as if there is any major slowdown on the horizon for the firm. The problem is, when slowdowns do emerge, they tend to catch investors by surprise (as investors in Asos know only too well). With this being the case, I’m not a buyer of the Boohoo share price today, I think that there are plenty of other investments out there with the potential to generate returns without taking on excessive risk.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo group. The Motley Fool UK owns shares of and has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

On Wednesday, the ASOS share price spiked by 15% on the release of full-year results, so what does that say to both groups of shareholders? Well first, the ASOS results lived up to their upbeat expectations.

The firm saw revenue climb by £494m to £2,417m, up 26%. And in the hard-pressed UK market (which thanks to international expansion now accounts for only 37% of retail sales), we saw a 23% rise. That’s pretty impressive, considering how UK shoppers are supposedly reining in their spending.

Profit growth

Even during this capital-intensive expansion phase, ASOS managed to drive pre-tax profit up by 28% to £102m, and earnings per share came in similarly ahead at 98p.

Chief executive Nick Beighton made the point that “our reported profit increase was achieved despite bearing material transition costs due to our investment programme.“

Boohoo’s last set of results, interims delivered in September, showed the same kind of pattern — but with a bigger sales rise from a lower level at its earlier stage of development.

Revenue soared by 50%, and that also fed strongly through to the bottom line, with pre-tax profit up 22% and adjusted EPS up 31%. Boohoo also saw growth across all its international markets, with UK sales still growing nicely.

The question is, what should Boohoo shareholders learn from the experience of ASOS?

Any lessons?

There is the obvious similarity in the soaring growth pattern of their shares, and a sober lesson to be learned from ASOS is that it appears to have been pushed too far too soon — as happens so many times with what I term bandwagon shares. Although ASOS shares did touch a new peak earlier this year, they’ve since fallen back and are still not managing to hold the levels they reached as long ago as 2013.

If you’d bought ASOS at its early peak and held until today, you’d have had a poor ride.

So does that mean Boohoo shareholders are going to suffer the same pain? Not necessarily, and it’s all down to valuation. What really scared me about ASOS was the super-lofty P/E ratios its shares managed to reach. Over the past few years, it has regularly traded on multiples of around 60 to 70, which doesn’t leave a lot of room for safety.

But at least the P/E valuation of ASOS shares has subsided, and we’re looking at a forward multiple, based on August 2019 earnings, of only 42. That’s still high, but not enough to make my eyes water. And though I didn’t think I’d say this so early, I’m starting to see ASOS shares as possibly not overvalued.

Not as toppy

Looking back at Boohoo, though the share price performance looks remarkably similar, we don’t see quite the same super-high valuation levels. Forecasts suggest a forward P/E of 54 for February 2019, dropping to 44 a year later — actually around the same level as the more mature ASOS.

It’s possible that ASOS took the early pain and investors are now sharper when it comes to valuing Boohoo. And earnings growth could push both to new bullish phases. Saying that, I still see too much risk in both of them.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

From revenues of just £67m in 2013, for 2018 the company reported sales of £580m and the City is predicting revenues of just over £1bn for 2020.

To help achieve this growth, Boohoo has announced today that it is appointing a new CEO to oversee the company’s next phase of expansion.

The next stage of growth 

John Lyttle, who is currently the chief operating officer of Primark Stores Limited, is stepping into the CEO role on March 15 2019. 

Over the past eight years, Lyttle has helped drive turnover at Primark higher by 158%, to £7bn. The company is also changing some other management roles to “support the journey of the group through its further international expansion.” 

The firm’s current joint CEOs and founders, Mahmud Kamani and Carol Kane are moving to group executive chairman and executive director respectively when Lyttle takes his place. Meanwhile, non-executive chairman Peter Williams is also stepping aside.

It looks to me as if this management reshuffle is sort of a coming-of-age marker for Boohoo. The company’s founders are taking a step back from the day-to-day management of the business and are being replaced by a manager who has more experience in managing a global fashion brand.

I reckon Lyttle’s expertise at Primark will be invaluable in helping Boohoo achieve its next stage of growth.

However, while I’m generally positive on the outlook for Boohoo, I’m not in a rush to buy the company’s shares because its valuation leaves little room for mistakes. The stock is currently trading at a forward P/E of 44, and even though earnings per share (EPS) are expected to expand 42% for fiscal 2019, this does not seem to justify the high multiple. The PEG ratio is more than one.

A better buy? 

With this being the case, I’m more attracted to Pets At Home (LSE: PETS). It can’t match Boohoo when it comes to growth, but it still has an impressive growth track record. Sales have increased by 50% over the past six years, making it one of the market’s faster-growing companies.

Despite this growth, the market has recently fallen out of love with Pets because rising costs are eating into profit margins. Looking at the City’s numbers for the next two years, the company’s top line is projected to grow by around 10%, but EPS will remain unchanged.

So, what’s to like about Pets? Well, I’m attracted to the business for its low valuation. The shares are trading at a forward P/E of just 9, a world away from Boohoo’s premium multiple and giving a wide margin of safety (unlike Boohoo).

On top of the bargain basement valuation, Pets also yields 6.3% so investors will be paid to wait for the business to return to growth. 

As demand for the group’s services remains high (quarterly revenue growth hit 5.3% year-on-year for the company’s latest period) I reckon it is only a matter of time before the firm’s bottom line returns to growth.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.